Government has 2 tasks in the FTTH debate

Wednesday 27 January 2010 | 16:47 CET | Market Commentary

US alternative operator Cbeyond has asked the FCC to change its unbundling policy. For several years, the American incumbent operators have been exempt from local loop unbundling requirements, under the so-called Brand X decision. Cbeyond would like to see the FCC overturn this, in order to ensure open access to especially Verizon's FTTP network.

The FTTH Council North America and the Telecommunications Industry Association have called on the FCC to reject Cbeyond's petition. The industry lobby groups have also rejected the international study from the Berkman Center, part of Harvard University, that found open access is good for broadband penetration and provides for lower prices, more capacity and faster speeds.

The most important argument for the Brand X rule is that Verizon, AT&T and Qwest would de facto not invest in FTTx if they were required to provide access to their networks via LLU. If that's the correct decision or not is now the issue. These companies have threatened the American government more than once with the possibility of giving their cash flow to shareholders rather than investing in networks. In Europe, Deutsche Telekom tried something similar a few years ago, calling for a 'regulatory holiday' or it wouldn't roll out FTTC. While the German government, partly due to pressure from the EC, did not give in, the argument had the desired effect in the US. The issue was further complicated by the fact that the cable operators had already succeeded in avoiding regulation. Cable broadband was qualified as an 'information service', rather than a 'telecommunication service', and as a result escaped regulation. With an 80 percent market share for cable, the telcos wanted a 'level playing field', free from LLU obligations.

There are various arguments for a change in American regulations. First is the FTTH penetration in the US, which after a few years of investment is still relatively limited. Verizon is the only operator to have deployed the technology on any significant scale. After five years, its service passes around 12 million households and has around 3 million subscribers. Despite the easy regulatory environment, AT&T and Qwest have not progressed beyond FTTC, supplemented by VDSL. This suggests that waiving LLU obligations doesn't really help stimulate FTTH.

Second is the FTTH Council NA's argument that if it weren't for the incumbents, there would be no FTTH. Not true - there are donzes of cities in the US with FTTH plans. However, these have been bombarded with lawsuits from both the telcos and the cable operators (cities such as Lafayette, Louisiana and Chattanooga, Tennessee can say more about this). As a result FTTH plans are smothered, even in rural areas where the incumbents have no plans to roll out fibre anyway.

Third, what's the difference between the US and Europe? Both regions have market-driven economies, high prosperity and are largely urbanised. They also have a similar leve of competition from cable. The only difference is the powerful lobby culture and tendency towards courtroom battles in the US. There are millions spent on lobbying in Washington - and the FTTH Coucil North America and TIA know how to operate in this culture.

A fourth argument centres on the nature of open access. It's highly questionable whether this is bad business as is often claimed, such as now by the FTTH Council North America. The 'modern' viewpoint (also known as telco 2.0) goes that telecoms is increasingly about volume and capacity utilisation, and not just retail but also wholesale income (see our commentary ‘Telecom: it's a volume business, stupid'). This is exactly what the Berkman report shows. Furthermore, FTTH is a natural monopoly - nobody needs two or three highways to their door. LLU ensures that there is still competition on the basis of infrastructure. In other words, companies such as Verizon want a big piece of the telecom pie, while open access ensures that the pie gets bigger.Verizon's market share may be lower, but its overall revenues can be higher due to wholesale income.

If we look to Europe, LLU regulation has had better results than the situation in the US without LLU. European countries score much higher in broadband penetration rankings from the OECD, PointTopic and Akamai. And more countries are adopting LLU, most recently in Switzerland and (outside Europe) in Australia.

Even in Europe though the incumbents aren't sure. And that brings us to the second issue for stimulating FTTH: not just regulations (LLU) but also the incentivisation of management at listed companies plays a role (see our commentary ‘Guidance, IT hold back KPN's FTTH ambitions). As long as directors are rewarded with options and shares they will focus on the short term, just like the average investor. Even investment analysts normally don't make estimates more than two years ahead. Furthermore, telecom stocks are often held because of the stable cash flows from operations. That's fine as long as no major network uprades come up, but the transition to FTTH does not fit this view. By changing the way telecom management are incentivised, the government can ensure a more long-term vision. FTTH is made for the long term, as it contributes to growth as well as cost savings. As UAE operator Etisalat recently noted: FTTH uses 73 percent less energy and emits 85 percent less CO2.

Conclusion: the silent majority in the US who are not satisfied with the current broadband market can hope that the Obama admiistration and its newly appointed FCC can reverse the Brand X regulations. While this may be difficult given the strong lobby culture in the US, it's clear the government can play a role. Not as an investor, as this often distorts the market, but as a faciltator. The government must ensure a clear regulatory environment and a different form of remuneration for telecom management. At the same time, the focus needs to remain on the ultimate goal of government: economic growth, satisfied citizens

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